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Daily Newsletter, Tuesday, 05/29/2007

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Table of Contents

  1. Market Wrap
  2. New Plays
  3. In Play Updates and Reviews

Market Wrap

Small Caps Lead Modest Advance

Boosted by a decline in energy prices and a rebound in consumer confidence, the Russell 2000 Index ($RUT.X) 837.53 +0.92% outpaced the large cap benchmarks in a relatively quiet post-holiday trade.

Advancing issues outnumbered decliners throughout, and while the major indexes struggled to hold gains at the midpoint of Tuesday's trade, buyers held their ground toward the close.

Volumes at both the big board and the NASDAQ were light as the Memorial Day weekend marks the beginning of summer vacations. With just two days left in the month, volume levels have been brisk in May with the NYSE averaging just over 2.9 billion shares traded per day, up a hefty 11% from April's 2.63 billion share per day average. NASDAQ volume is up a healthy 13% at 2.09 billion shares per day after an anemic 1.85 billion per day average in April.

U.S. Market Watch - 05/29/07 Close

Oil prices fell sharply with July Crude Oil (cl07n) settling down $2.05, or -3.14% on hopes that the inauguration of a new president in OPEC member Nigeria would contribute to stable supply from the Niger Delta region.

Nigeria's President Umaru Yar'Adua used his inaugural address to call for an immediate cessation of hostilities. The main militant group, the Movement for the Emancipation of the Niger Delta, said they are considering the request.

"We're pulling the plug. It's certainly a big drop, a material drop in price," said Tim Evans, an energy analyst at Citigroup Global Markets. "Basically, the new president is calling for Nigerian unity. He's waving the olive branch and it makes us feel more secure regarding Nigerian oil supplies."

Both the Oil Service HOLDRs (AMEX:OIH) $166.62 -0.88% and CBOE Oil Index (OIX.X) 724.68 -0.73% traded weak.

Headed into Thursday's June unleaded futures settlement, July Unleaded (rb07n) plunged lower by $0.1171, or -5.07% to settle at $2.1934.

Exacerbating the decline in unleaded was Valero Energy (NYSE:VLO) $73.62 -1.49% saying it plans to restart the gasoline-producing catalytic cracking unit at its 170,000 barrel-per-day McKee refinery in Sunray, Texas tomorrow at 01:00 PM EDT.

The unit was shut on Thursday to fix catalyst circulation problems.

Crude oil intake at the McKee refinery has been at 50%, or 85,000 barrels-per-day, since the plant restarted on April 13 after being shut down for two months following a fire.

While the catalyst work was being done, the refinery's crude intake was down to 80,000 barrels-per-day. Roughly 30,000 barrels-per-day of gasoline output as well as 3,000 barrels-per-day of jet fuel production were lost.

The refining giant said it hopes crude oil throughput at the McKee facility will reach 150,000 barrel-per-day by the end of June, but the refinery won't return to 170,000 barrels-per-day before the end of the year.

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Economic data released today had the Conference Board saying its consumer confidence index rose in May as an upbeat business outlook and higher stock prices overshadowed record gasoline prices.

The Conference Board said its index of consumer sentiment rose to 108.0 in May versus an upwardly revised 106.3 reading in April. The median forecast among economists was for 105.0 after a previously reported 104.0 reading in April, which was the lowest reading since August 2006.

The Conference Board said the present situation index rose to 136.1 in May from an upwardly revised 133.5 in April, while its expectations index increased to 89.2 in May from an upwardly revised 88.2 reading in April.

The business research group said its recent survey of consumers' assessment of the job market didn't change much in May. Consumers surveyed who said jobs were "plentiful" held a revised 29.0% in May versus April's 29.0%.

Those who said jobs were "hard to get" slipped to 19.9% in May from a downward adjusted 20.3% in April.

Treasuries witnessed selling at the short-end of the curve with the 5-year Treasury Yield ($FVX.X) rising 3.1 basis points to 4.827%.

I think the selling there was based on Canada's central bank holding interest rates unchanged at 4.25% for the eighth-straight meeting, but saying "an increased risk" that inflation will persist above 2.0% still has Canadian monetary policy makers leaning more towards tightening than loosening rates.

I continue to follow 30-day Fed Fund futures here in the U.S., where market participants still see the Fed holding rates unchanged out to October (ff07v) 94.78 -0.01%. That is, if I take 100, then subtract 94.78, I get 5.22%. The Fed's current target on Fed funds is 5.25%.

Merger Tuesday!

With equity markets closed in the U.S. on Monday, there were still some CEO's making deals over 3-day weekend.

One of the nation's largest apartment REITs, Archstone-Smith (NYSE:ASN) $60.15 +8.90% followed through on Friday's gains. The Englewood, CO-based company said it had agreed to be acquired by a partnership sponsored by Tishman Speyer and Lehman Brothers (NYSE:LEH) $72.91 +0.20% for $22.2 billion (including $6.9 billion in debt), or $60.75 per share.

Local telephone service provider CT Communications (NASDAQ:CTCI) $31.39 +45.45% had shorts dialing 911 after the company said it had agreed to be acquired by Windstream (NYSE:WIN) $14.90 -0.13% for $585 million in cash, or $31.50 per share.

The Networking Index (NWX.X) 277.67 +3.11% closed at a new multi-year high with component Avaya (NYSE:AV) $15.76 +15.28% rocketing higher on speculation that Canada's Nortel Networks (NYSE:NT) $25.99 +0.77% could be set to make a bid for the company. Over the weekend, Avaya postponed an investor conference. The Wall Street Journal reported that Avaya was in talks with private equity firm Silver Lake about a leveraged buyout and had also held talks with Nortel about a possible deal. Avaya's shares were atop today's most active list with 52.8 million shares changing hands. Heavy considering the stock usually turns about 6.4 million shares per day on average.

Alcan (NYSE:AL) $86.00 +1.17% added $1.00 per share on rumors that the Canadian-based maker of aluminum products may be considering a sweetened bid from Norway's Norsk Hydro (NYSE:NHY) $35.03 -1.07%. Last week, Alcan turned down a hostile $27.4 billion bid from rival Alcoa (NYSE:AA) $40.37 -1.29%. Canada's Globe and Mail suggested Norsk Hydro could be planning a $30 billion bid for Alcan.

China Revelation

In last Monday's Market Wrap I discussed China's continuing to take steps towards revaluation of the yuan against the U.S. Dollar and wanted to quickly follow up on the changes, or lack of changes, since Monday's wrap.

US Large Cap, Small Cap, China and Japan

One of the more notable changes since last Monday (5/21/07) is that China's Hang Seng Index ($HSI.X) has fallen 2.19% as of their Tuesday (05/29/07) close as the dollar ($) weakens ever so slightly against the yuan by 0.19%.

I'd be hard pressed to say that "small caps" as depicted by the Russell 2000 (RUT.X) have seen some safe-haven rotation, but they have shown a gain relative to the large-cap indexes.

Meanwhile, the dollar has risen fractionally (+0.16%) against Japan's yen, and the Nikkei-225 ($NIKK) has also gained a more impressive 0.66%.

The main point, or observation I want to follow up on is how currency relationships, which can impact trade, may indeed be impacting market participants' decisions on where they place their capital.

S&P Depository Receipts (SPY) - WEEKLY Intervals

Last week, there was great chatter regarding the recently released short interest position that bears have built, even as the major indexes build some impressive gains.

Looking at an SPY WEEKLY bar chart gives us the opportunity to "turn on the volume."

A couple of weeks ago (see 5/14/07 Market Wrap) we were noting a "doji" on the weekly interval chart that may have been a warning sign for a reversal in trend.

So far, the SPY has been able to inch higher and volume has been building.

All volume tells us is that there is GREAT DISAGREEMENT among market participants at this point as to where the SPY is headed, but I would think a CLOSE above $152.62 could bring agreement among buyers.

If a technician like myself thought the "doji" was meaningful (and I do still at this point), then it would take a CLOSE below that $150.86 to begin to think that sellers were getting any type of a hand on things.
 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
None None

New Long Plays

None today.
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

Long Play Updates

Arch Coal - ACI - close: 41.20 change: -0.28 stop: 38.95

ACI tried to breakout over the $42.00 level this morning but failed. The stock slid lower throughout the rest of the session with a minor bounce in the last thirty minutes. The overall trend remains bullish but today's action might suggest another pull back toward the $40.00 level and its 10-dma soon. More conservative traders may want to tighten their stops or do some profit taking here. Our target is the $42.50-45.00 range.

Picked on May 09 at $38.44
Change since picked: + 2.76
Earnings Date 07/23/07 (unconfirmed)
Average Daily Volume: 3.6 million

---

Business Objects - BOBJ - cls: 41.05 chg: +0.38 stop: 38.95

BOBJ was already a rumored takeover target so news today regarding other potential tech-related takeover deals renewed enthusiasm in BOBJ. The stock rose 0.9% and closed at new one-year highs. Our target is the $44.00-45.00 range. The P&F chart is bullish with a $53 target.

Picked on May 21 at $40.15
Change since picked: + 0.90
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume: 1.5 million

---

Anheuser Busch - BUD - cls: 52.23 chg: +1.25 stop: 48.95

Investors bought the dip at $50.82 this morning and BUD was off to the races. The stock soared 2.45% on big volume today. The breakout over $52.00 is definitely bullish. The strong volume on the recent rallies is also bullish. The long-term trend has BUD trading in a wide, rising (bullish) channel. Our target is the $53.85-54.00 range and it could take a few weeks to get there.

Picked on May 06 at $50.50
Change since picked: + 1.73
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume: 3.1 million

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Columbia Sportswear - COLM - cls: 67.51 chg: +0.64 stop: 63.39

COLM was back to its winning ways on Tuesday. The stock tried to breakout over the $68.00 level and ended up 0.95% by the closing bell. The P&F chart has a very bullish triangle breakout pattern with a suggested $89.00 target. Our target is the $69.85-70.00 range.

Picked on May 21 at $66.25
Change since picked: + 0.94
Earnings Date 07/26/07 (unconfirmed)
Average Daily Volume: 235 thousand

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EMC Corp. - EMC - close: 16.48 change: +0.02 stop: 15.45

EMC couldn't decide which direction it wanted to go today. Shares closed essentially unchanged. We'd prefer to buy a dip near $16.00, which should be support, but we are suggesting new long positions now. Our target is the $18.50-20.00 range. The P&F chart has a $24.00 target.

Picked on May 27 at $16.46
Change since picked: + 0.02
Earnings Date 07/17/07 (unconfirmed)
Average Daily Volume: 26.6 million

---

ENSCO - ESV - close: 59.10 change: -0.33 stop: 55.85

Oil stocks were struggling on Tuesday. News that workers in oil-exporter Nigeria had called off a strike and news that the U.S. was seeing some of its refineries coming back online sent crude oil futures down 3%. Shares of ESV slipped 0.5%. More conservative traders may want to raise their stop loss to breakeven. Our target is the $61.50-62.00 range. The Point & Figure chart is more optimistic with an $82 target.

Picked on April 29 at $56.84
Change since picked: + 2.26
Earnings Date 04/24/07 (confirmed)
Average Daily Volume: 2.9 million

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Gerdau Ameristeel - GNA - cls: 15.73 chg: +0.13 stop: 14.49

GNA seems to be fighting for every inch but it's still climbing higher over the bodies of dead bears. The stock spiked higher this morning to $16.35 and then slipped back to close up 0.8%. The spike was due to news last Friday about a deal with the United Steelworkers in Canada. We are not suggesting new positions at this time. More conservative traders may want to tighten their stops toward $14.75 or toward $15.00. This remains an aggressive, speculative play. Our target is the $17.50-18.00 range. The P&F chart points to a $29 target.

Picked on May 20 at $15.23
Change since picked: + 0.50
Earnings Date 07/30/07 (unconfirmed)
Average Daily Volume: 552 thousand

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Kansas City Southern - KSU - cls: 40.20 chg: +0.00 stop: 37.75

KSU closed unchanged on Tuesday as it continues to churn sideways above the $40.00 level. We are seeing a bearish divergence between price and the daily chart's MACD. You can also see the divergence in the RSI indicator. More conservative traders may want to tighten their stops. Our target is the $43.50-44.00 range. Currently the P&F chart points to a $45 target.

Picked on May 17 at $39.61
Change since picked: + 0.59
Earnings Date 07/26/07 (unconfirmed)
Average Daily Volume: 716 thousand

---

Superior Energy - SPN - cls: 39.27 chg: +0.06 stop: 37.99

SPN managed to buck the trend in oil stocks on Tuesday. The 3.1% drop in crude oil undermined most of the sector but SPN produced a 0.15% gain as traders bought the dip near $39.00. SPN is still struggling with the $40.00 level so more conservative traders may want to avoid new positions here. Our target is the $42.50 level. The P&F chart is very bullish with a $65 target.

Picked on May 13 at $38.42
Change since picked: + 0.85
Earnings Date 08/01/07 (unconfirmed)
Average Daily Volume: 1.5 million

---

Encore Wire Corp. - WIRE - cls: 28.97 chg: -0.29 stop: 27.95

WIRE's lack of follow through on last Friday's bounce is not a good sign. The stock did trade off its lows for the session but it might turn out to be a better play if readers wait for a new relative high over $29.70 or $30.00 before initiating positions. The Point & Figure chart suggests a $46 price target. We are targeting the $32.50-33.00 range.

Picked on May 27 at $29.26
Change since picked: - 0.29
Earnings Date 07/24/07 (unconfirmed)
Average Daily Volume: 383 thousand
 

Short Play Updates

MarineMax - HZO - cls: 20.00 chg: -0.02 stop: 21.51

Our bearish play in HZO is now open. The stock broke down under round-number support at the $20.00 level and hit $19.88 intraday. Our suggested trigger to short it was at $19.95. Now that the play is open our target is the $17.75-17.50 range. It is VERY important that traders realize HZO has a high amount of short interest. The latest data put short interest at $28% of the 16.8 million-share float. That's a lot of short interest and a small float. Unfortunately, that can be a recipe for a big short squeeze and our stops may not help in what your broker will call a "fast market". More conservative traders may want to pass on this one.

Picked on May 29 at $19.95
Change since picked: + 0.05
Earnings Date 07/26/07 (unconfirmed)
Average Daily Volume: 354 thousand

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Staples Inc. - SPLS - cls: 23.95 chg: -0.45 stop: 25.76

SPLS continued to under perform on Tuesday. The stock lost 1.8% and broke down under the $24.00 level on big volume, which is another bearish sign. We would still consider new positions here. Our target is the $22.00 level. We will use a relatively wide (aggressive) stop loss until we see some further confirmation lower.

Picked on May 27 at $24.40
Change since picked: - 0.45
Earnings Date 07/27/07 (unconfirmed)
Average Daily Volume: 7.0 million

---

U S T Inc. - UST - close: 54.31 chg: -0.42 stop: 56.21

UST has offered us another entry point for shorts. The stock produced another failed rally under the $55.00 level today. A breakdown under $54.00 would produce a new Point & Figure chart sell signal. We have two targets. Our conservative target is $52.60-52.50. Our more aggressive target is the $50.50-50.00 range.

Picked on May 23 at $54.96
Change since picked: - 0.65
Earnings Date 07/26/07 (unconfirmed)
Average Daily Volume: 965 thousand
 

Closed Long Plays

British Amer. Tob. - BTI - cls: 67.41 chg: +1.21 stop: 63.49

Target achieved. BTI gapped open higher at $67.46 and rallied to $68.22 before paring its gains. We checked the news on BTI, MO and RAI and couldn't find anything to explain the gap higher in BTI today. If you did not exit at our target consider tightening your stop toward $65.00. Shares look short-term overbought and due for a pull back.

Picked on May 07 at $64.05
Change since picked: + 3.36
Earnings Date 04/27/07 (unconfirmed)
Average Daily Volume: 105 thousand

---

Western Refining - WNR - cls: 46.35 chg: +3.63 stop: 39.75

Target achieved. Tuesday turned out to be a big day for WNR. Just after one o'clock Eastern time shares spiked higher on huge volume to close up 8.49%. The move was fueled by news that the courts had ruled in favor of WNR and their proposed merger with Giant Industries (GI). The courts also removed the temporary injunction placed by the U.S. Federal Trade Commission (FTC). Later in the day the FTC announced that they will appeal the decision. Our target was the $47.00-50.00 range. Today's high was $47.55. If this deal goes through WNR could see even more upside so more aggressive or longer-term investors may want to hold WNR. Bear in mind that we would expect some profit taking after today's big move.

Picked on May 27 at $42.72
Change since picked: + 3.63
Earnings Date 08/02/07 (unconfirmed)
Average Daily Volume: 801 thousand
 

Closed Short Plays

None
 

Today's Newsletter Notes: Market Wrap by Jeff Bailey and all other plays and content by the Option Investor staff.

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